Protecting loved ones is the main purpose of life insurance, but here are four tax benefits to consider.
The primary purpose of life insurance is to provide a death benefit to help replace lost income and protect loved ones from the financial losses that could result from the insured’s death. But did you know that most permanent life insurance policies accumulate cash value and potentially offer you certain tax advantages? Here are four tax benefits:
- You pay no current federal income tax on potential cash value growth. As the cash value accumulates, it is not subject to current taxation.
- You pay no federal income tax if you borrow cash value from the policy through loans. As a general rule, loans are treated as debts, not taxable distributions, if structured properly. This can give you access to cash value on a tax-advantaged basis. After a sizable amount of cash value has built up, it can be borrowed against to help supplement retirement income as your need for life insurance decreases and in many cases, you’ll not pay income tax on the gain. (Keep in mind that these loans are charged interest and reduce the death benefit and cash value; if a policy lapses or is surrendered with an outstanding loan, a portion may be taxable; and there are certain polices that are subject to different tax laws.)
- Your beneficiaries generally pay no federal income tax on death benefits. Therefore, a $500,000 policy delivers $500,000 in benefits with no deductions and no withholding required.
- Avoid estate taxes on the death benefits. You can avoid potential estate taxes on life insurance death benefits by transferring ownership of the policy to another person or trust more than three years before your death. Your tax advisor or attorney can explain the particulars for your circumstances.
A policy that builds cash value is generally called permanent insurance and is designed to provide long-term life insurance coverage, generally for the insured’s entire life. In the case of whole life insurance, the premium stays the same for the life of the policy, and it can accumulate cash value, which is available to the policyowner through policy loans.
Want to know more? Ask the experts!
-“The Tax Advantages of Permanent Life Insurance”, newyorklife.com
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